In the matter Of Ketaki Estates And Finance Ltd

 

 

1.      Wiezmann Capital Ltd, a merchant banker, filed a draft open offer document dated April 21, 2001 for acquiring 640,000 shares of Ketaki Estate & Finance Ltd (hereinafter referred to as ‘KEF’), on behalf of the acquirer Shri Jithendernath Alluri and persons acting in concert with him viz., Smt. Rajeshwari Alluri, Smt. Chintalapati Laxmidevi and Smt. Swati Alluri. KEF is listed public company having its registered office at Mumbai. As per the aforesaid draft offer document the acquirers, vide Memorandum of Understanding dated March 12, 2001, agreed to acquire 1,636,530 equity shares of KEF from the persons who were part of promoter group viz., Expert Hotel & Properties Pvt Ltd, Fundamental Finvest Pvt Ltd, G.S. Modi, M. Chand Distributing Co. Pvt Ltd, Narayan Distributors Pvt Ltd, New Ways Finance Pvt Ltd, Nikat Finlease Ltd, Rajhans Exports Pvt Ltd, RKM Securities Pvt Ltd, Saraf Credit & Portfolio Pvt Ltd, Sincere Management Services Pvt Ltd, Subam Capital Services Pvt Ltd, Tyagi Trading Pvt Ltd, Prabhat Management Services Pvt Ltd, RRP Management Services Pvt Ltd, Joginder Associates Pvt Ltd, R.K. Bansal Finance Ltd, Sunlog Credit Pvt Ltd, Medusa Associates Pvt Ltd, (hereinafter collectively referred to as ‘the sellers’). The aforesaid agreement to acquire shares and the consequential change in control and management of KEF triggered the open offer for which the aforesaid offer document was filed. As per Para No.4.15 of the aforesaid offer document, chapter II of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as ‘SAST’ Regulations) were not complied by the sellers. Based on the aforesaid information with respect to the non-compliance of SAST Regulations by the sellers it was decided to launch adjudication under Sec. 15A(b) of SEBI Act, 1992 against the sellers.

 

2.      SEBI appointed Smt. Poonam Bamba as the Adjudicating Officer under Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 read with Section 15 I of SEBI Act, 1992 to inquire into and adjudge the failure of RKM Securities Pvt. Ltd. (hereinafter referred to as RKM for the sake of brevity) to make disclosures of its share holding in KEF to the company, in violation of Regulations 6(1) & (3) and 8(1) and (2) of the SEBI (SAST) Regulations, 1997 under 15A(b) of the SEBI Act, 1992, vide order dated May 02, 2001.

 

3.      In view of the launching of the amnesty scheme by SEBI in the year 2002, the matter was kept in abeyance. Subsequently, Shri S.V. Krishna Mohan was appointed as Adjudicating Officer in the place of Smt. Poonam Bamba vide order dated March 18, 2004 as the sellers did not avail the amnesty scheme. Thereafter, vide the order dated December 07, 2004 the undersigned was appointed as Adjudicating Officer in the matter.

 

4.      Notice dated July 10, 2001 was issued to RKM under Rule 4(1) SEBI (Procedure For Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 communicating the alleged violation of provisions of SEBI (SAST) Regulations, 1997 as detailed under:

 

Sl. No (1)	SAST Regulation (2)	Due date for compliance as per regulation (3)	Actual date of compliance (4)	Delay (no. of days) (4)-(3)
1	6(1) & (3)	20.04.1997	-	(not complied)
2	8(1) & (2)	21.04.1997	-	(not complied)
3	8(1) & (2)	21.04.1998	-	(not complied)
4	8(1) & (2)	21.04.1999	-	(not complied)
5	8(1) & (2)	21.04.2000	-	(not complied)
6	8(1) & (2)	21.04.2001	-	(not complied)

 

5.      The notice also called up RKM to show cause as to why an inquiry in terms of the adjudication rules should not be conducted against it. However, RKM did not reply to the notice. In the above circumstances the then Adjudicating Officer was of the view that an inquiry should be held in the matter and accordingly notice of inquiry dated October 16, 2002 was issued to RKM, fixing the date for inquiry on October 30, 2002. RKM, vide letter dated October 30, 2002 requested for additional time of 15 days to submit its reply. However, from the records placed before the undersigned, it was noticed that the then Adjudicating Officer did not take any decision on the request of RKM. Subsequently, vide letter dated November 23, 2002, RKM submitted that it would avail amnesty scheme announced by SEBI.

 

6.       Subsequently, another notice of inquiry, was issued to RKM by Shri S.V. Krishna Mohan, the then Adjudicating Officer vide letter dated June 21, 2004, fixing August 12, 2004 as the date of inquiry, on noticing that none of the sellers availed the amnesty scheme. The said notices of inquiry was sent by registered post with acknowledgement due but returned undelivered. Subsequently, notices of inquiry dated November 01, 2004 was issued by the then Adjudicating Officer to RKM fixing November 11, 2004 as the date of inquiry. This notice sent by registered post was also retuned undelivered.

 

7.      In the above circumstances, the undersigned thought it fit to issue a fresh notice of inquiry to RKM and accordingly, vide notice dated December 14, 2004 RKM was advised to attend inquiry on January 06, 2005. The said notice sent by registered post was returned undelivered. The undersigned, therefore, issued a fresh notice of inquiry dated February 01, 2005 fixing February 17, 2005 as the date for inquiry. This notice was sent to the Northern Regional Office (NRO) of SEBI  vide letter dated February 02, 2005 requesting it to affix the same in terms of Rule 7(c) of the Adjudication Rules. NRO, vide its letter dated February 09, 2005 stated that the said notice was affixed on the premises at the address given in the notice. However, no representative of RKM was present before the undersigned on February 17, 2005. Therefore, the undersigned decided in terms of Rule 4(7) of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 to proceed with the inquiry as it appeared that RMS deliberately failed to appear for the inquiry.

 

8.      The relevant Regulations in the instant matter are as follows:

6(1) Any person, who holds more than five per cent shares or voting rights in any company, shall within two months of notification of these regulations disclose his aggregate shareholding in that company, to the company.

 

6(3) A promoter or any person having control over a company shall within two months of notification of these regulations disclose the number and percentage of shares or voting rights held by him and by person(s) acting in concert with him in that company, to the company.

 

8(1) Every person, including a person mentioned in regulation 6 who hold more than fifteen percent shares or voting rights in any company, shall, within 21 days from the financial year ending March 31, make yearly disclosures to the company, in respect of his holdings as on 31^st March.

 

8(2) A promoter or ever person having control over a company shall, within 21 days from the financial year ending March 31, as well as the record date of the company for the purposes of declaration of dividend, disclose the number and percentage of shares or voting rights held by him and by persons acting in concert with him, in that company to the company.

 

9.      Upon careful perusal of the Regulations, the undersigned is inclined to give RKM the benefit of doubt for the alleged violation of Regulation 6(1) SEBI (SAST) Regulations, 1997 for the reason that there is no information available on record pertaining to the number and percentage of shares of KEF held by RKM nor did RKM state its quantum of holding in KEF at the relevant time. RKM merely stated that it would avail the amnesty scheme.

 

10.  However, RKM did not dispute that they were part of the promoter group. Therefore, RKM was under obligation under regulation 6(3) not only to disclose its own holding to KEF by April 20, 1997 but it was also required to disclose the number and percentage of shares of KEF held by persons acting in concert with it. In the instant case that would mean the shareholding of all the promoters of KEF. There is nothing on record to suggest that RKM made the disclosure in the aforesaid manner. Therefore, the undersigned finds that RKM violated the provisions of regulation 6(3) of SEBI (SAST) Regulations, 1997 for the year 1997.

 

11.  The aforesaid finding is applicable mutatis mutandis in respect of regulation 8(2) also. Therefore, violation of regulation 8(2) of SEBI (SAST) Regulations, 1997 is also established as there is nothing on record to suggest that RKM made the annual disclosure for the years 1997-2001.

 

12.  However, violation of regulation 8(1) of the SEBI (SAST) Regulations, 1997 is not established as it pertains to annual disclosure by persons who hold more than 15% of the target company’s equity and the material on record does not provide information on the shareholding of RKM. The above findings are summarized in table below.

 

 

13.  SEBI came out with ‘SEBI Regularization Scheme, 2002 for Non compliance with Regulations 6 and 8 of the SEBI (SAST) Regulations, 1997’. The said scheme was open from 01.10.02 to 31.12.02 and subsequently extended till 20.02.03. It is unambiguous from the material made available to the undersigned by SEBI that RKM did not participate in the aforesaid amnesty scheme. The violations being thus established as above, only the quantum of penalty to be imposed on RKM remains to be decided.

 

14.  The information on holding of the promoter in the target company is vital to the investors as it has bearing on the control and management. When there is more than one promoter, it is imperative that the information on their individual and aggregate shareholding is made available to the investors, through the stock exchanges. However, when the collective shareholding of the promoters is not disclosed, as in the instant case, then investors are forced to take investment decisions on insufficient information. That would be the anti- thesis of the spirit of SEBI (SAST) Regulations, 1997.

 

15.  In this context the order dated March 20, 2002 of the Hon’ble SAT in the appeal no. 48 of 2001 in the matter of Luxury Foams Ltd. vs SEBI may be cited. The relevant portion is reproduced here for ready reference.

 

“In this context, the object of the regulation should be remembered. It is meant for “information disclosure” to the investors. Had one of the appellants complied with the requirements of disclosing the acquisition of shares made by him and the remaining 10 appellants, it would have been considered sufficient, as such an action would have met with the object for which the regulation is put in place. But since there is a failure in this regard, imposition of penalty on each one of the appellants –acquirers-is legally in order.”

 

16.  From the above, it is clear that the duty to make disclosure under Regulation 6(3) & 8(2) of SEBI (SAST) Regulations, 1997 is joint and several in nature and if there is a violation, the liability for penalty is also joint and several in nature.

 

17.  Section 15A(b) of Securities and Exchange Board of India Act, 1992 prescribes a punishment of five thousand rupees for every day during which the violation continues, if any person who is required under the Act or any rules or regulations made thereunder to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations. With effect from October 29, 2002, the aforesaid punishment has been increased to one lakh rupees for each day or one crore rupees whichever is less.

 

18.  To determine the quantum of penalty under Section 15A(b), the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992 viz.(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default.

 

19.  As regards the disproportionate gain or unfair advantage there are no quantifiable figures available on record with respect to the default of the company. There are also no figures or data on record to quantify the amount of loss caused to an investor or group of investors as a result of the default. However, the default in disclosure to the company was repetitive in nature as the disclosures were not made consecutively for several years by RKM.

 

20.  Therefore in exercise of the powers conferred under section 15-1(2) of the SEBI Act, 1992, read with Rule 5 of the Securities and Exchange Board of India (procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, I hereby impose a penalty of Rs. 65,000/- on RKM Securities (P) Ltd. for the aforesaid violations. It shall pay the said amount of penalty by way of demand draft in favour of “SEBI - Penalties Remittable to Government of India”, payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to Shri S.V. Muralidhar Rao, General Manager, Division of Corporate Restructuring, Mittal Court, 1^st floor, “B” Wing, 224, Nariman Point, Mumbai 400 021.

 

21.  In terms of Rule 6 of the SEBI (Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, copies of this order are sent to RKM Securities (P) Ltd., and also to SEBI.

 

 

 

Date: March 3, 2005                                   A. Chandra Sekhar Rao

Place : Mumbai                                            Adjudicating Officer